Is the RMB Undervalued?

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ACKNOWLEDGEMENT

I would like to take this chance for thanking my research facilitator, friends & family for support they provided & their belief in me as well as guidance they provided without which I would have never been able to do this research.

DECLARATION

I, (Your name), would like to declare that all contents included in this thesis/dissertation stand for my individual work without any aid, & this thesis/dissertation has not been submitted for any examination at academic as well as professional level previously. It is also representing my very own views & not essentially which are associated with university.

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ABSTRACT

This dissertation analyzes the issue of RMB appreciation and its impact on US Economy. In this dissertation we analyze whether RMB is undervalued or not. What are the bases for claiming that RMB is undervalued and whether RMB undervaluation does harm to United States economy or not. There are several methods available to ascertain the equilibrium exchange rate, we adopt the purchasing power parity approach for this research. Analysis of the RMB exchange rate and trade imbalance showed that, there is significant relationship between the RMB exchange rate and trade imbalance, and there is a systematic mutual influence which determines the relationship between the U.S. dollar nominal exchange rate changes.

TABLE OF CONTENTS

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 01: INTRODUCTION1

Background of the Study1

Structure of the Dissertation3

Problem Statement4

Research Questions5

Significance of the Study5

CHAPTER 02: LITERATURE REVIEW6

China Exchange Rate Policy6

Equilibrium Exchange Rate8

Equilibrium Exchange Rates Prediction Models10

CHAPTER 03: RESEARCH METHODOLOGY11

Purchasing Power Parity Approach11

Absolute Purchase Power Parity (APPP)12

Relative purchase Power Parity (RPPP)14

CHAPTER 04: CALCULATION OF EQUILIBRIUM REAL EXCHANGE RATE16

China Exchange Rate and US Export and Import18

China Trade Surplus22

Appreciation of RMB in 2005 and 2008 and impact on US economy24

Impact of Revaluation on Growth Rate24

Yuan Appreciation and Inflation in USA26

Imbalance of China-US trade relationship28

CHAPTER 05: CONCLUSION30

Policy recommendations31

REFERENCES33

LIST OF TABLES

Table 1: Valuation of RMB based on Relative Purchase Power Parity17

Table 2: United States Trade Balance with China from 1985 to 2011 (in $ Billions)19

Table 3: US overall Trade Balance22

Table 4: China Overall Trade Balance23

Table 5: USA and China GDP Growth Rate25

Table 6: US major import Countries in 201126

LIST OF FIGURES

Figure 1: Revised Big Mac Index Based on GDP and Big Mac Prices14

Figure 2: Trend Analysis of US Trade Balance20

Figure 3: US Import and Export with China Trend Analysis20

Figure 4: US Export to China25

CHAPTER 01: INTRODUCTION

Background of the Study

“Enough is enough; we're going to become a firm that China should operate by the same rules as everyone else. We could not give them, the advantage of the United States”. These are the glimpse of remarks of President Barak Obama of United States of America at a closing news conference at APEC summit in Honolulu on November 14, 2011 (Bloomberg, 2011). These are the toughest remarks against any country by Barak Obama as a President of USA. In daily life, we usually hear news about Chinese exchange rate policy. The effect of china exchange rate on US economy is the prominent topic for both policy debate and analytical discussions. U.S.A occasionally raised the issue of Chinese ...